Most days, I enjoy reading the Wall Street Journal. But I may have to cancel my subscription if the editors continue to miseducate the public and embarrass themselves about the pending legislation to allow for the modification of home mortgages in bankruptcy. On December 13th’s Opinion page, the Wall Street Journal lauded itself for warning "in October about this legislation, which would allow bankruptcy judges to treat mortgage debt the same as credit-card debt." The Wall Street Journal in October did say the legislation will "allow bankruptcy filers to treat home loans as similar to unsecured credit-card debt."
The problem is that BOTH OF THESE STATEMENTS ARE NOT FACTUALLY ACCURATE. Stop writing them! There is no pending legislation that proposes to treat mortgage debt the "same" (or even "similar to") the way credit card debt is treated in bankruptcy. A fact-checker should not let these statements go to print. This is not a matter of speculative or normative disagreement between the Wall Street Journal and me about what the effect would be on interest rates if consumers could modify their home mortgages in bankruptcy–neither of us knows that for sure, and they can certainly assert their belief that if the Conyers bill becomes law mortgage interest rates will climb to credit card rates (and I’ll respectfully disagree). They should not, however, make clear misstatements about pending legislation or existing law. As a number of Credit Slips posts have explained (see here and here and here), the legislation simply would not transform mortgages into unsecured debt, which is the form of most credit cards. Even if the bill passed, the mortgage liens would remain valid; the lenders would have the ability to foreclose on property if they were not paid. And there would be no ability to discharge the debt in a Chapter 7 proceeding (as there is in most instances for credit cards).
I did benefit from reading the editorial. In addition to learning that the Wall Street Journal doesn’t read Credit Slips, and apparently hasn’t read the Bankruptcy Code or the Conyers bill very carefully either, I got a chuckle out of the sarcastic reference to Justice Stevens as a Cato Institute fellowship winner.
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Comments
10 responses to “Bankruptcy Blasphemy: (Continued) Embarrassment for the Wall Street Journal”
With apologies for sending in so many comments:
Katie is right that the WSJ is not accurately stating the result that would be achieved by the bills. But it is true that if stripdown (or cramdown if you prefer) of a home mortgage is permitted, then a portion of the mortgage debt will be treated as an unsecured debt. So the WSJ characterization makes some sense as to the portion of the mortgage debt that would be rendered unsecured, in those cases in which the property is worth less than the amount of the mortgage debt.
Katie writes that the mortgage lien would remain valid even if one of the proposed bills became law. But the mortgage lien would remain valid only to the extent of the current value of the property under any of the proposed bills other than the Specter bill. Thus a portion of the mortgage lien would be voided where the amount of the mortgage exceeds the value of the property.
And I don’t want to be too picky, but it is the case now that mortgage debt can be discharged in a chapter 7 case, just as it would be true if any of the bills were enacted. The discharge does not eliminate the lien of the mortgage but it does eliminate personal liability on the mortgage debt (to the extent the debtor ever was personally liable, which will differ from state to state depending on the scope of any depression-era antideficiency legislation).
Mark Scarberry
Pepperdine
I appreciate Prof. Scarberry’s more detailed breakdown of the effect of the mortgage bill. However, I stand by my main point that the WSJ’s description is inaccurate. There is a big difference between a possibility that some amount of the debt could be discharged while the lender retains a lien in the property, and the way in which credit card debt is usually treated in bankruptcy–a complete discharge of the entire amount of the debt and the lender never had a lien in any of the debtor’s property.
As to Prof. Scarberry’s point about the lien only being valid to the extent of the property’s value at the time of bankruptcy under most versions of the proposed bills, this is correct. But as Prof. Nathalie Martin explained in her posts, this is the exact result the lender would get in a foreclosure without bankruptcy–the lien will give the lender the right to the property and the lender can sell it for whatever the property is worth. While in some states a deficiency is possible outside of bankruptcy, some of the states with the highest sheer numbers of foreclosures (including California and Arizona) prohibit deficiency judgments (The lender can look to the property to recover and that is it.) And the economic reality may be that many of these families have no assets that can be levied upon to collect a deficiency judgment anyway.
I should have chosen my words more carefully with regard to my comment that mortgage debt cannot be discharged in bankruptcy. I am grateful for Prof. Scarberry explaining to readers that mortgage debt can be discharged in a Chapter 7 bankruptcy, but the lien remains on the house. In simple terms, this means that if the homeowner stops paying the mortgage lender, the lender can foreclose–even though the “debt” was discharged in bankruptcy. A credit card issuer has no parallel leverage to ever collect discharged debt in a Chapter 7 case, however, so I still think the analogy is inapt and misleading.
Prof. Porter (sorry if Katie was too informal, but Mark is fine with me) does truly excellent work in the bankruptcy area, and I’m pleased to be dialoguing with her by way of these comments.
I agree completely with the first paragraph of her last comment; she is quite right that the WSJ description is inaccurate. I also appreciate the kind words in her third paragraph.
With regard to the second paragraph of her last comment, I would note only two points.
First, consider what a mortgage holder gets by way of a chapter 13 plan under several of the proposed bills. Via the chapter 13 plan the debtor will propose to make (but not quite promise to make) payments, during what appears to be in the short term a declining market, of the stripped-down value of the home, with the payments to be made over a long period of time at a court-determined interest rate that is likely quite a bit below market.
Is that the equivalent of allowing the mortgage holder to foreclose now? I don’t think so.
With regard to the shorter term, perhaps Prof. Porter could explain whether the mortgage holder would be entitled to adequate protection payments to make up for any diminution in value of the home during the term of the plan. Proponents of the legislation talk about a right to adequate protection, but I don’t see it in the bills. A requirement for such payments (e.g., a $20,000 lump sum payment if the home’s value fell by $20,000) could lead to early failure of most plans incorporating home mortgage strip down, because the debtor could not make the payments. And of course the lost value would be indeed lost, if the debtor could not make the adequate protection payment.
And with regard to the longer term, is it appropriate to let the home owner profit — to the exclusion of the holder of the stripped-down mortgage — from the appreciation that generally follows a downturn and will likely occur in many areas of the country over the next five to ten years? I don’t think so. (See my response to Allan’s comment to the post below with regard to restoration of value to the mortgage.)
Second, if I remember correctly, California (and perhaps other states that have depression-era antideficiency statutes?) allows a deficiency judgment where the home mortgage is judicially foreclosed and where it was a refi rather than a purchase money mortgage. Many of the distressed mortgages are refinancings. Thus the discharge of personal liability on a mortgage does have some substantial meaning even in California.
Mark Scarberry
Pepperdine
Prof. Scarberry, I believe some of your comments are not correct.
First, you say “Via the chapter 13 plan the debtor will propose to make (but not quite promise to make) payments, during what appears to be in the short term a declining market, of the stripped-down value of the home, with the payments to be made over a long period of time at a court-determined interest rate that is likely quite a bit below market.”
RESPONSE 1: The Debtor does “promise to make” the payments. The remedies for the lender if the Debtor fails to make the payments are precisely what you suggest the lender is deprived of – the lender can get relief from the stay to foreclose upon a plan default, or the case will be dismissed for failure to make plan payments, in both cases providing the lender with the right to foreclose. Your suggestion that the debtor somehow is not as bound to make the plan payments as fully as the debtor would be if it “promised” to make the payments outside of a plan is mistaken.
RESPONSE 2: What is the basis for your contention that the “court determined interest rate” is “quite a bit” below market? The “court determined interest rate” is required by law to provide the lender with the present value of the amount of the secured claim. Thus, except in the case where a court errs (and I trust you agree with me such errors are the small exception), the lender is not at risk of losing its principal value of the secured claim (with respect to the stripped down unsecured deficiency claim, Ms. Porter’s reply accurately explains why the lender cannot recover it in a foreclosure anyway, so it is the market, and not the bankruptcy process, that has caused the lender to incur this loss). Thus, the risk of losing money is not enlarged, and thus there is no reason to believe the market would increase the interest rate to account for this nonexistent risk. The lender’s loss is limited to the portion of the interest payment that reflects profit to the servicer, but the source of capital still recovers its full return on the advance of the capital. This is in fact precisely equivalent monetarily to “allowing the mortgage holder to foreclose now” since in both cases the maximum recovery, and indeed the likely minimum recovery, is the current cash value of the secured portion of the claim. Indeed, one might argue chapter 13 maximizes the lender’s return, since it protects the lender from the reduction in value that the lender would incur if through foreclosure the mortgaged property were added to an already glutted market.
2. You say “With regard to the shorter term, perhaps Prof. Porter could explain whether the mortgage holder would be entitled to adequate protection payments to make up for any diminution in value of the home during the term of the plan. Proponents of the legislation talk about a right to adequate protection, but I don’t see it in the bills.
RESPONSE: Well, yes, a mortgage holder would be entitled to adequate protection payments to make up for any diminution in the value of the home during the plan. True, the language requiring such adequate protection is not in the bills, but only because that language already appears in section 361 of the bankruptcy code. At the time of confirmation the lender can demand the property be valued to ensure the lender receives adequate protection. True, there is no process in place to value the property throughout the plan period to determine whether market forces are causing a decline in value of the property. But there is no process in place outside of bankruptcy to value mortgaged residential property prospectively, either. Lenders are as exposed to a declining market with respect to non-bankrupt lenders as they are with respect to bankrupt lenders. If lenders really needed to be able to value the property repeatedly until the mortgage is repaid, and if lenders really needed prospective protection against subsequent market reductions in value of residential property, then lenders would insist that such a right be included in the mortgage contract. The bankruptcy court would be required to honor such a provision going forward if it existed, and lenders would have the right during a chapter 13 plan to enforce those provisions. But lenders neither include such a right nor regularly re-value property prior to repayment of the loan with respect to residential properties generally; even in the “short term declining market” you suggest lenders are so concerned about. Those who deploy capital for these loans either are satisfied the return (the interest rate protected by the bankruptcy court) compensates them for this risk, or they do not perceive it to be a risk worth considering. There is no reason Congress should protect lenders from risks they do not seem to care to protect themselves against. Indeed, the prospect of further default by the borrower in bankruptcy should be reduced due to the restructuring of the borrower’s overall personal balance sheet, making the need for such unusual revaluation rights even more unnecessary.
Similarly, your suggestion that “[a] requirement for such payments (e.g., a $20,000 lump sum payment if the home’s value fell by $20,000) could lead to early failure of most plans incorporating home mortgage strip down, because the debtor could not make the payments. And of course the lost value would be indeed lost, if the debtor could not make the adequate protection payment” is remarkable. When do you propose a lender should be able to measure, and thus insist on compensation for, this decline in value? Who do you suggest should pay the transaction costs for making this extraordinary determination, uniquely to be necessary after confirmation of a chapter 13 plan?
3. You say “And with regard to the longer term, is it appropriate to let the home owner profit — to the exclusion of the holder of the stripped-down mortgage — from the appreciation that generally follows a downturn and will likely occur in many areas of the country over the next five to ten years? I don’t think so. (See my response to Allan’s comment to the post below with regard to restoration of value to the mortgage.)”
RESPONSE: Well, yes, it is appropriate. The quid pro quo in a chapter 13 for the right to strip down the mortgage and capture appreciation is the Debtor’s dedication of future income towards the plan payments. If what you are suggesting is that the lender should be able to recapture the anticipated future appreciation, then the restrictions on chapter 7 eligibility should be eliminated so the homeowner can discharge the debt obligations. The current scheme allows the lender to have its cake and eat it, too – compel the debtor to dedicate future income but deprive the debtor of the economic appreciation resulting from the debtor’s efforts to use future income to make the plan payments.
Ultimately, your argument implicates the core philosophical dispute about what, precisely, is the purpose of the bankruptcy laws. Is it, as you suggest, to maximize creditor recovery in an efficient manner, or is it, as others have argued, to provide the equity holder with an opportunity to recover some of the lost investment without jeopardizing the creditors’ core interests? I support the latter, while you support the former. This is a philosophical debate that has continued for decades. There is nothing inappropriate about the political process permitting the kinds of compromises between these competing philosophies embodied in the pending legislation.
Finally, it is impossible not to notice the deliberately false arguments made by some proponents of BAPCPA are echoed by those who oppose the pending legislation. Recall that the WSJ, along with other BAPCPA proponents, argued enactment of BAPCPA would reduce losses to credit card issuers and thereby would reduce the interest rates charged on credit cards. Anyone see any reduced credit card rates lately? Didn’t think so. The burden of proof is much higher on those who advocate for or against changes to the bankruptcy code based on arguments echoing those that are and always were demonstrably meritless when made by BAPCPA proponents. While undoubtedly Prof. Scarberry makes his arguments in good faith and with unquestioned integrity, his arguments are based on assumptions that I submit are at best questionable and at worst discredited both by others who used these arguments dishonestly in the BAPCPA debates and by events since enactment of BAPCPA.
For the Journal’s opinion pages to start acknowledging facts that do not support their (often completely wacko) ideological predispositions is about as likely as the Communist Party deciding to start every meeting by singing paeans to capitalism.
Mark,
I am not so sure that I would support creditors any extra protection agains the loss of value in the property during the course of the plan. That would actually be putting the creditor in a better position than they would have been in had there been no bankruptcy (and the borrower did not default), as the creditor would be free of substantial costs in selling the house. Further, the security instrument created at the beginning of the bankruptcy would be valid at the end and we could have a rule that, if the plan is carried out the debt could not be discharged for a number of years.
Moreover, the general trend is for housing prices to rise (except, perhaps in Flint, Michigan).
With apologies for the length of this comment, which responds to a long comment that made a lot of points:
A. I appreciate it that Jeffrey Sternklar—a distinguished partner in a distinguished Boston law firm—took the time to respond at length to my previous comments. He will not be surprised to learn that I disagree with almost everything in his comment, but it is good to have a frank and complete airing of views. (By the way, he and others should feel free to call me “Mark” just as I call Prof. Porter “Katie” and Prof. Lawless “Bob.” They use the title “Professor” when referring to commenters who are professors so that other readers will have some context. But “Mark” is fine with me, and I will thus refer to Mr. Sternklar as “Jeffrey,” if that is all right with him.)
B. Jeffrey argues that the debtor does promise to make the payments that are provided for in a chapter 13 plan. I have to disagree. The court isn’t going to force the debtor to keep the home and continue to make payments on the secured claim under the plan if the debtor decides that he or she cannot afford to do so. The debtor would be permitted to walk away from the home. That might result in dismissal of the case or it might lead to a modification of the plan (as some courts now permit when a debtor decides to surrender an automobile part way through the plan). And the debtor has a nonwaivable right to dismiss the chapter 13 plan and eliminate any obligation under it. Of course that will have consequences, but nevertheless the debtor is not obligated to perform under the plan. If necessary, the debtor could dismiss the chapter 13 and then file a chapter 7 (probably without having to wait the 180 days that might in some cases be required by section 109(g)). If the debtor’s income was too high for the debtor to stay in chapter 7, then the debtor could convert the case to chapter 13 and propose a new plan that did not include payments on the secured portion of the home mortgage debt. The deficiency, to the extent of any personal liability, could be discharged in the chapter 13 case.
C. The court-determined interest rate probably will be quite a bit below a market rate for several reasons. Under the Supreme Court’s Till decision, a true market rate probably is not required under the current provisions of the Code to which Jeffrey refers (supposedly requiring payment of full present value). In addition, the bills pending in Congress might allow the debtor to lock in for many years a below-market teaser rate, (which then technically would not be court-determined but rather court approved). In some cases the bills would call for the rate to be set by the court at the conventional mortgage rate published by the Fed plus a risk premium of probably one to two percent. As Bankruptcy Judge Bennett testified before the Senate Judiciary Committee (at the same hearing at which I testified), such formula rates generally are substantially below market. No lender today would make a 100% loan-to-value mortgage loan at such a rate (especially not to a debtor who is in financial trouble); indeed, in today’s market a debtor without stellar credit probably could not get a 100% loan at any rate.
D. Jeffrey argues that the lender will not suffer any loss of the stripped down principal amount of the mortgage, but I don’t understand how that follows. If the property’s value drops during the three to five years of the chapter 13 case, and if the debtor then defaults, the lender will foreclose and receive the diminished value. Note that this risk is not the one that the lender agreed to take; the lender agreed to take the risk that if the debtor failed to maintain the agreed-upon payments, and if the lender then foreclosed, the value of the property might have dropped from the time of the loan origination. But under the proposed bills, the debtor may have missed several payments—which the debtor need not make up—and the debtor will be paying less than the agreed-upon amount each month, and the property’s value may be dropping while the lender is prevented from foreclosing.
E. Jeffrey goes on to say that the lender is entitled to adequate protection payments to make up for diminution in value of the property during the chapter 13 case, but then seems to say that there does not appear to be a mechanism for that right to be enforced. He suggests that the absence of a provision in the mortgage for a default on diminution in value shows that the lender should not receive such protection in a chapter 13 case. But of course the borrower typically is in default before filing the chapter 13 case, and (under the pending bills) would be paying monthly payments amounts that are less than the amounts required by the contract. Thus, absent bankruptcy, the lender would have the right to foreclose, rather than having to wait and watch the value of the property decline, with the likely result that at some point the debtor will walk away and leave the lender with a diminished value.
Jeffrey then asks, “When do you propose a lender should be able to measure, and thus insist on compensation for, this decline in value? Who do you suggest should pay the transaction costs for making this extraordinary determination, uniquely to be necessary after confirmation of a chapter 13 plan?” Well, ordinarily a secured creditor is entitled to seek relief from the automatic stay at any time, and if the debtor cannot show that the secured creditor is adequately protected, then under section 362(d)(1) the lender is entitled to move against the property. That seems ordinary rather than extraordinary.
I don’t see how a debtor can show that an undersecured lender is adequately protected in a declining market, other than by providing cash payments that ordinarily would be beyond the debtor’s means. I suppose a court, in the new situation that would be created were one of the pending bills to become law, could hold that the lender is bound by the confirmed plan per section 1327(a) and thus would have no right to move against the property so long as plan payments were current, even if relief from stay were granted.
F. I also don’t understand the supposed quid pro quo that Jeffrey posits. He says, “The quid pro quo in a chapter 13 for the right to strip down the mortgage and capture appreciation is the Debtor’s dedication of future income towards the plan payments.” Well, debtors currently must dedicate future income towards plan payments, and they don’t get to strip down home mortgages. Where is the quid pro quo that the pending bills would provide? I’d note also that when such capture of future appreciation came to Congress’s attention (in the chapter 11 context in the Pine Gate case), it resulted in the inclusion of the section 1111(b)(2) election very late in the process of enactment of the 1978 Code. And Congress acted rather quickly to back up Nobelman by extending its protections (a year later in 1994) to chapter 11 cases. So I don’t see any broad bankruptcy policy allowing debtors to capture future appreciation through strip down. Note that (to simplify somewhat) in the chapter 11 context the equity owners cannot receive or retain any interest in the reorganized business unless (1) creditor classes consent, or (2) creditors are being paid in full.
G. I don’t agree with Jeffrey’s description of the philosophical divide between us. I’m not one of the “bankruptcy is only for the purposes of efficient debt collection” people. Consumer bankruptcy largely is designed (and appropriately so) to give honest but unfortunate debtors a fresh start by relieving them of burdensome debt. Chapter 11 is largely (and appropriately) designed to preserve jobs and going concern value.
I do think it’s important not to impede the ability of future borrowers to obtain home loans that they can afford. If we have a philosophical divide, it may be over whether an equity bonus should be given to current debtors at the risk of harming future borrowers.
There also is something unseemly about retroactively affecting home mortgages that were originated at a time when the Code provided that they could not be modified in chapter 13. If particular lenders have acted in predatory ways, we could target them, but we should be slow to create the impression that vested property rights backed up by specific Bankruptcy Code protections are not secure. Of course, we could do it retroactively, but it would not be wise. Fool me once, etc.
H. Jeffrey’s final point is that some people used arguments about the cost of bankruptcy and its effect on credit card interest rates to push the 2005 BAPCPA. That some people used an inapposite argument in a very different context doesn’t mean that the argument is not appropriately used elsewhere. A marginal increase in return on unsecured credit card debt was never going to reduce the cost of credit, because the basic risk characteristics of the obligations were little changed. But uncertainty in the multi-trillion dollar secondary market for mortgages (a market that has made low cost home mortgages accessible) and a basic change in the risk characteristics of mortgages (e.g., by allowing them to be stripped down at a low point in the real estate cycle) may well extract a substantial price.
We can disagree on that point, but I think Jeffrey would have to agree that some changes in the rights of mortgage holders would have a substantial effect. (Suppose we gave debtors a $100,000 homestead exemption in bankruptcy, with priority over mortgages. Can anyone doubt that such a provision would have a dramatic effect?) So the question is not whether changes in risk characteristics ever can have an effect, but whether the changes proposed by the bill are the kind that would do so. It is simply irrelevant that poor or insincere arguments for BAPCPA were made in a very different context.
In any event I was not and am not a fan of BAPCPA. One of the points I made in my testimony is that some of the pending bills use the BAPCPA chapter 7 means test – a truly awful set of statutory provisions – to identify debtors who could modify their mortgages in chapter 13. How many of us would like to see the vagaries and inconsistencies of the means test used in yet another context? I doubt you’d find a bankruptcy judge in the country who’d be happy about that.
Mark Scarberry
Pepperdine Univ. School of Law
Mark, responding to your identically lettered paragraphs:
A. I’ve been called many things, but rarely “distinguished.” Thank you! I appreciate the time and effort you took to engage in this discussion.
B. I don’t understand the difference you are positing between what happens in bankruptcy and what happens outside of bankruptcy. Chapter 13 plans requiring payment of mortgage debt is just as binding and enforceable, indeed even more so, that is a mortgage contract. In both cases, if the borrower cannot pay, then the borrower loses the home. In both cases, if the borrower cannot pay, a court will not compel payment. True, the debtor can dismiss a chapter 13, but the lender has all of its contractual rights after dismissal, so the retention of a right to dismiss a case does not impair the lender’s contractual rights. True, in chapter 7 (not in chapter 13), the bankruptcy discharge allows some borrowers to avoid paying the deficiency, which is the unsecured portion of the debt. But that is not unique in any way to mortgages, as all unsecured creditors have the same risk.
C. What do you mean by “quite a bit”? Till does not require a market rate because there is no market for chapter 13 borrowers. However, Till seeks to apply a rate based upon assessments made regularly by commercial lenders, in an effort to mimic a market rate that a lender would charge. “The approach begins by looking to the national prime rate . . . WHICH REFLECTS TOHE FINANCIAL MARKET’S ESTIMATE OF THE AMOUNT A COMMERCIAL BANK SHOULD CHARGE a creditworthy commercial borrower to compensate for the opportunity costs of the loan, the risk of inflation, and the relatively slight risk of default.” (emphasis added). The court noted “[b]ecause bankrupt debtors typically pose a greater risk of nonpayment than solvent commercial borrowers, the approach then requires a bankruptcy court to adjust the prime rate accordingly. The appropriate size of that risk adjustment depends, of course, on such factors as the circumstances of the estate, the nature of the security, and the duration and feasibility of the reorganization plan.”
The only aspect of a “market rate” that Till does not require is the component of a market rate representing compensation to the servicer and profit to the lender. Till recognizes that full repayment of the secured claim to the lender, however, is protected. The interest rate required to satisfy the confirmation requirements in chapter 11 (section 1129(b)(2)(A)(ii)) and(iii)) or chapter 13 (1325(a)(5)(B)(ii) and(iii)) must be sufficiently high that the payments under the plan are at least equal to the value of the secured claim. Till emphasizes and implements, rather than changes, this point. Indeed, under Till, a lender can demand a higher interest rate if it can demonstrate there is a risk of post-confirmation market value erosion that would prevent it from getting the full value of its secured claim; outside of bankruptcy, a lender cannot increase the interest rate if it fears further market value erosion. Also under Till, a lender is able to argue for a higher rate if, as you allege (but which I believe from my experience is unlikely), a borrower could not get a 100% loan under any circumstances. The interest rate may be high, but even in this environment 100% loans are available to risky borrowers.
Thus, the lender’s rights are greater in bankruptcy than outside of bankruptcy. To the extent the pending bill would vitiate the lender’s adequate protection rights, I agree with your objections to it. Where we depart is where you measure the legitimacy of the lender’s recovery in bankruptcy against what the lender could recover outside of bankruptcy upon the occurrence of a payment default. All creditors, not just lenders, are subject to different outcomes in bankruptcy, and there is nothing inherently improper or unfair about bankruptcy because it produces different results from those occurring outside of bankruptcy. Indeed, that’s the whole point of bankruptcy – it alters the rights of all creditors.
D. You are mixing apples and oranges here. What bankruptcy alters is the right of a lender to foreclose due to a payment default, regardless whether there is a decline in value of the property. Outside of bankruptcy, market declines in value are not events of default, and the lender does not have the right to foreclose. What you really complain about is that the lender cannot exercise its contractual right to foreclose upon the occurrence of a payment default where it perceives itself at risk to a market decline. That the lender is deprived of the foreclosure right upon a payment default (the apple) has nothing to do with whether a lender has the right to foreclose if the property is declining in value (the orange).
With respect to the orange, again the lender in fact has more protection in bankruptcy from a market decline in value than it has outside of bankruptcy. In bankruptcy, as you note, the lender has a statutory right to adequate protection. As you note, a lender could move for relief from the stay to foreclose if the borrower cannot compensate the lender for the market caused value erosion, even absent any payment default. This is a right existing only in bankruptcy. A lender can hardly complain about its enhanced rights under this state of affairs.
E. This point is related to those you express in other paragraphs. The crux of your complaint is that the borrower will not be paying the interest rate, or otherwise be held to the terms, required by its contract. All creditors, not just mortgage lenders, suffer changes to their contractual rights. The entire concept of bankruptcy would be objectionable if alterations from contractual rights were to remain inalterable. Similarly, that a lender (to the exclusion of other creditors) cannot use the happenstance of a payment default to foreclose to protect itself from a perceived risk of market value decline is not a result that causes me any heartburn.
F. You are correct that the quid pro quo exists under current law. The point is that the election to use future income under chapter 13 has been taken away from debtors. Previously, any debtor could elect chapter 7 to discharge the deficiency. Now only some debtors can do that. Those that do not qualify for chapter 7 are subject to a partial specific performance remedy compelling payment through a chapter 13 plan. Generally lenders do not have such a specific performance right outside of bankruptcy, and I find it inappropriate that they are granted this right in bankruptcy. Absent repeal of the means test for chapter 7, the new rights granted to borrowers restores some needed balance indirectly in a “rough justice” sort of way.
G. Positing the issue as a contest between current and future equity holders is another way of saying credit will be impaired if the bill passes. At bottom this is the same “reducing lenders contractual rights increases interest rates and reduces credit availability” argument so disingenuously made by many of BAPCPA’s supporters, and so dramatically discredited by the contraction of credit and the absence of meaningful reductions in the cost of credit in the wake of BAPCPA’s enactment. Where are the real life facts that support this ideologically driven conclusion? I question whether the availability and cost of credit to future borrowers will be materially affected, if at all, by passage of the pending bill.
H. I agree that the fact an argument is invalid in one set of circumstances does not mean it per se is invalid in all circumstances. My point is that the arguments made by BAPCPA supporters, and echoed in your posts, are based on ideology, not facts, and have not been proven valid in either context relevant here. The current bills are imperfect, but they are paragons of virtue and logic compared to BAPCPA. It raises all sorts of red flags when arguments used cynically and hypocritically by supports of BAPCPA, a truly flawed law, are echoed in objections to the pending bills simply because they are less than perfect.
Thanks.
What is the DIFFERENCE between (a.) filing bankruptcy before the non-judicial foreclosure sale and then giving up the home and (b.) allowing the non-judicial foreclosure to proceed, allowing a deficiency judgment to be entered against you and then filing bankruptcy?
What is the DIFFERENCE between (a.) filing bankruptcy before the non-judicial foreclosure sale and then giving up the home and (b.) allowing the non-judicial foreclosure to proceed, allowing a deficiency judgment to be entered against you and then filing bankruptcy?